Beware the risk of a scorched-earth strategy from Iran, say Bank of America strategists

Bank of America strategists say investors should keep their hedges in case of a scorched-earth response by Iran. - -/ICANA NEWS AGENCY/Agence France-Presse/Getty Images

Buy-the-dip traders were massively rewarded on Monday after wild swings in oil markets sent Dow futures from down over 1,000 points to a 200-point gain.

Bank of America’s equity derivatives strategists, led by Nitin Saksena, say it’s too early to celebrate.

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“With the Iranian regime doubling down on hardline leadership (and having burnt bridges with neighbors), the risk lies in assuming we are out of the woods. A scorched earth strategy aimed at maximizing economic disruption to shock financial markets remains perhaps their most potent lever,” they said.

The strategists pointed out much of last week’s pain in markets was concentrated in pockets that previously had strong momentum, like U.S. materials XLB, emerging-market equities EEM and metals and mining XME.

“In our view, these observations highlight how periods of high uncertainty can amplify momentum and reflexivity in markets, pushing prices away from fundamentals and leaving the most crowded trades (often those with high BRI readings) vulnerable to sharp positioning- and sentiment-driven reversals,” they said.

BRI stands for bubble-risk indicator, which distills an asset’s returns, volatility, momentum and fragility into a single reading from 0 to 1, with 1 representing extreme bubblelike price action.

U.S. stock futures ES00 rose on Tuesday as oil futures CL00 fell sharply once more.

Iran launched new attacks on Israel and Gulf countries, a day after mixed messages from President Donald Trump on how long the war would last.

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